By Jack Hough

A handful of companies in the S&P 500 index boast dividend yields of over 6%, although "boast" probably isn't the right word. Brandish? A yield that high, especially now, is a warning. It means that a company is struggling, and perhaps that investors fear a payment cut. These companies are the opposite of the Magnificent 7. Call them the Suspicious 8.

But the cash is tempting. A 6.3% yield -- the group median -- doubles an investor's money in 11 years if the share price doesn't budge. And there are always success stories. AT&T's stock price has swelled 84% over two years, making investors 106%, and pulling the dividend yield down from suspicious territory to a more credible 4%.

Let's run through the current list in hopes of finding another bounceback waiting to happen. One caveat: Regard this as an act of morbid curiosity, not an advisable investing strategy. Dividends are a good idea -- a much better one than investing newcomers might realize, for reasons I'll explain now. But there are better ways to get them.

The S&P 500 pays 1.1%, the lowest since the dot-com bubble a quarter-century ago. That is owed to swelling stock valuations and corporate cash hoarding. Dividends were just 36% of profits last year, 20 points below their average since 1926, according to an analysis by Hartford Funds.

If current yields understate the importance of dividends, the effect of compounding math over the longest investment periods overstates it. Since 1960, reinvested dividends have contributed some 85% of the S&P 500's cumulative return. But most investors don't set aside money for more than 80 years.

Consider something in between: the contribution of dividends by decade. In the 2010s, they made up only 17% of returns, and so far in the 2020s, just 12%, according to Hartford Funds. But for all decades since the 1940s, the average is 34%. And for the decades when total returns disappointed, dividends kicked in more, like 67% of total returns in the '40s, and 73% in the '70s.

If today's ambitious stock valuations are a sign of lower returns to come, dividends will be welcome. But don't just grab after the biggest ones. Wellington Management finds that stocks with moderate yields have beaten high-yielders over the long run. According to Ned Davis Research, rising yields are a better idea still. Stocks with new or rising dividends returned 10.2% a year on average from 1973 to 2024, versus 6.8% for those with stagnant dividends, 4.3% for nonpayers, and minus 0.9% for payment cutters or quitters.

For investors looking for dividend growers, there are cheap exchange-traded funds that track them, like Vanguard Dividend Appreciation, which yields 1.6%, and ones that focus on bigger payers while factoring in dividend growth and other signals of financial strength, like Schwab US Dividend Equity, yielding 3.8%. Those are sensible strategies. By comparison, upside for the following Suspicious 8 runthrough ranks somewhere between sniffing expired milk and playing a scratch-off lottery ticket.

LyondellBasell pays 11.3%, the highest yield on the list. The chemical company faces a polyethylene glut, and free-cash-flow estimates for this year are well below the cost of the dividend. J.P. Morgan reckons that the bottom of the cycle hasn't yet been reached, and that a dividend cut isn't out of the question. Lyondell rival Dow cut its payment in half in July.

United Parcel Service yields 7.8%. The company is weathering a tariff-related demand slump while walking away from billions of dollars in low-margin business from Amazon.com. It is also cutting head count and closing facilities in the biggest capacity reduction in its history, which Raymond James reckons will provide leverage when the economy picks up. Management last quarter characterized the dividend as "rock solid strong."

Conagra Brands and Kraft Heinz both make the list, yielding 7.3% and 6.1%. Kraft slashed its dividend back in 2019. Profits for both companies are sliding. The packaged-food business is struggling with inflation, consumers trading down, and the rise of small insurgent brands. GLP-1 drugs are curbing millions more appetites per year. Kraft Heinz says it will split Heinz and Kraft Mac & Cheese from Oscar Mayer and Lunchables next year without cutting dividend spending.

I'm skipping real estate investments trusts, which turn rents into dividends, but the S&P 500 has two that yield 6.3% and have drug companies as tenants: Healthpeak Properties and Alexandria Real Estate Equities. On the list is Pfizer, also recently paying 6.3% after a two-day price jump of 14%. Under a deal with President Donald Trump, Pfizer will offer discounts on some of its drugs through a new website, TrumpRx.gov, to patients who lack insurance. The particulars seemed to cheer investors who had feared a harsh government pricing crackdown. "[Trump] seemed very happy about it, and Pfizer was singing his accolades, so at the end of the day I believe that's probably what the president wants," says BMO Capital Markets analyst Evan Seigerman.

Two names on the list have gained more than 30% this year, or twice as much as the S&P 500. Altria, yielding 6.2%, is making gains in oral nicotine pouches, but remains well behind Philip Morris International in smoke-free products, and UBS warns that it has resorted to big price hikes on cigarettes to offset volume declines. Ford Motor, 6.1%, has lately benefited from electric-vehicle customers racing to buy ahead of a key tax credit that expired in September.

Finally, Verizon Communications is the new AT&T in terms of sagging investor popularity. The bull case is that it's growing in fiber broadband while working to stem wireless share losses, and paying shareholders a hefty 6.4%. The bear case is that I wrote bullishly about it here in August.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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October 03, 2025 03:00 ET (07:00 GMT)

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